Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 79-100

1979-1 C.B. 152

Section 368

IRS Headnote

Reorganization; solely for voting stock; directors' qualifying shares. Under a plan of reorganization, a bank holding company acquired, in exchange for shares of its voting stock, all of a commercial bank's stock except for a nominal number of shares held by the acquired bank's directors as director's qualifying shares. Each director granted an assignable option to the acquiring corporation to purchase these shares for cash at their original cost when their directorship terminated. The acquired corporation would assign the option to the new director, who would acquire the old director's shares under the option. A new director's exercise of the option will not violate the "solely for voting stock" requirement of section 368(a)(1)(B) of the Code.

Full Text

Rev. Rul. 79-100

ISSUE

Will a new director's exercise of an option to purchase a terminating director's qualifying shares for cash violate the "solely for voting stock" requirement of section 368(a)(1)(B) of the Internal Revenue Code of 1954?

FACTS

X is a national banking association engaged in business as a commercial bank. It had outstanding only common stock, which was publicly held. Under a plan of reorganization entered into for good business reasons, Y, a bank holding company, acquired all of the X stock held by the X shareholders, except for a nominal number of shares of X stock held by its directors as director's qualifying shares, in exchange for shares of voting common stock of Y. The directors of X, some of whom had owned stock of X in addition to their qualifying shares, did not tender for exchange their qualifying shares of X stock because they were required by federal banking law to retain the stock in order to meet the legal requirements for directors of national banks.

Under the plan, for a nominal amount of Y voting stock as consideration, each director of X granted an assignable option to Y to purchase the director's shares upon the termination of the director's services. Each option enabled Y to assign to a new director the right to purchase for cash, out of the new director's own funds at the original cost, the former director's qualifying shares of X. Y would assign the option to a new director upon the director's appointment in exchange for a grant to it of an identical option by the new director. This provided a method of transferring director's qualifying shares to new directors, preventing anyone other than Y or a current director of X from owning X stock and of insuring that Y used only its voting stock to acquire X stock. The directors had no intention to resign their positions, and Y had no plan to vote its newly acquired X stock to force the directors to terminate their services.

LAW AND ANALYSIS

To qualify under section 368(a)(1)(B) of the Code as a reorganization, the consideration for whatever stock is acquired by the acquiring corporation must be solely its voting stock and nothing else. See Helvering v. Southwest Consolidated Corporation, 315 U.S. 194 (1942), 1942-1 C.B. 218.

While under section 1.368-2(c) of the Income Tax Regulations such an acquisition of stock is permitted tax free in a single transaction or in a series of transactions taking place over a relatively short period of time, the consideration for each acquisition in a related series to acquire the stock of the acquired corporation must be solely voting stock of the acquiring corporation.

In the instant situation, since the new directors will be required to purchase the qualifying shares with their own funds, no consideration other than voting stock will be received by the shareholders of X from Y.

HOLDING

A new director's exercise of an option to purchase a terminating director's qualifying shares for cash will not violate the "solely for voting stock" requirement of section 368(a)(1)(B) of the Code.